Habit Persistence and Zero Lower Bound Risk under Optimal Discretionary Monetary Policy

46 Pages Posted: 9 Feb 2022 Last revised: 22 Apr 2022

See all articles by Kohei Hasui

Kohei Hasui

Faculty of Economics, Aichi University

Satoshi Hoshino

Okayama Shoka University

Date Written: February 9, 2022

Abstract

Previous studies have shown that the risk of nominal interest rates hitting the zero lower bound (ZLB) has profound implications for monetary policy. In this paper, we show that habit persistence is a non-negligible deep parameter under optimal discretionary policy when the risk of the ZLB is taken into account. The uncertainty effect, which is defined as differences between risky steady states (RSS) and deterministic steady states (DSS), increases as habit persistence increases. Under empirically reasonable values of habit persistence, we show that the RSS of the nominal interest rate would reach the ZLB under optimal discretionary policy. Moreover, the uncertainty effect of the ZLB worsens welfare more as habit persistence increases.

Keywords: Liquidity trap, Zero lower bound, Habit persistence, Internal habits, Risky steady state, Uncertainty effect, Optimal monetary policy

JEL Classification: E31, E52, E58

Suggested Citation

Hasui, Kohei and Hoshino, Satoshi, Habit Persistence and Zero Lower Bound Risk under Optimal Discretionary Monetary Policy (February 9, 2022). Available at SSRN: https://ssrn.com/abstract=4029534 or http://dx.doi.org/10.2139/ssrn.4029534

Kohei Hasui (Contact Author)

Faculty of Economics, Aichi University ( email )

4-60-6
Hiraike
Nagoya, 453-8777
Japan

Satoshi Hoshino

Okayama Shoka University ( email )

2-10-1 Tsushima Kyomachi Kitaku
Okayama, 700-8601
Japan

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